‘HDFC Merger Contributed To HDFC Bank’s Troubles’

‘Once you’re wrestling with making a merger of that scale value-accretive, you’re also under pressure to keep growing the balance sheet and chasing liabilities, and other things start to slip as a consequence.’

IMAGE: Aditya Puri, former CEO of HDFC Bank. Photograph: Rediff Archives

Senior journalist and author Tamal Bandyopadhyay has watched HDFC Bank more closely than almost anyone outside it. His first book on the lender, A Bank for the Buck, was released in November 2012, when HDFC Bank was still being read as a poster child of India’s post-liberalisation banking story.

His second, HDFC Bank 2.0: From Dawn to Digital, arrived on the bank’s 25th anniversary, charting its transformation into what was then routinely called India’s most valuable digital-first lender.

Six years on from Aditya Puri’s retirement, the institution looks rather different. Sashidhar Jagdishan, who succeeded Aditya Puri in October 2020 after steering the bank’s technology overhaul, announced on August 29, 2026 that he will not seek a further term and will retire on October 26, once his current three-year tenure ends.

The board says it is fast-tracking his replacement.

The announcement follows a bruising eighteen months: then chairman Atanu Chakraborty’s abrupt resignation in March citing an ‘incongruence’ with his values, a Rs 45 crore deposit-mobilisation matter involving the Maharashtra State Road Development Corporation that saw the bank fine its own CEO, and a stock that has shed roughly a quarter of its value this year even as the wider market has held up better.

In this first half of the interview with Prasanna D Zore/Rediff, Bandyopadhyay explains why the bank Jagdishan inherited was not an easy one to run, and why the HDFC merger with HDFC Bank sits at the heart of the trouble.

‘Is this a different HDFC Bank today? Yes, unquestionably’

You have wonderfully chronicled HDFC Bank’s remarkable journey in considerable detail in the two books on the bank that you authored.
When you look at the bank today, amid questions over corporate governance, regulatory issues and another leadership transition, how different is this HDFC Bank from the institution you wrote about?

That’s really two or three questions rolled into one; So, let me take them apart.

My first book came out in November 2012. At that time, I approached it as a child of economic liberalisation — India opened up banking to private players in the early 1990s, gave out fresh licences, and HDFC Bank came out on top of that cohort. Best on growth, business model and, of course, stock-market valuation.

As far as governance is concerned, it was never flagged as a problem and the absence of red flags is itself worth something. But was it held up as a governance benchmark, the gold standard? I’m not saying the bank lacked governance; I’m saying it was never really examined through that lens, positively or negatively, because the question simply didn’t arise.

The second book came when the bank turned 25. By then, it had positioned itself as India’s digital bank — so that book was really a journey through its technology story.

Neither book was commissioned or paid for by HDFC Bank. Both calls came from my publisher. What the bank did give me was access — to people, to documents, to its early investors.

I should mention, your readers might find this interesting, that the original idea was to write a book on HDFC, the parent housing-finance company, not the bank. I had initially approached Deepak Parekh — HDFC’s chairman for 30 years till 2023 — with that pitch. He turned it down politely and said HDFC hadn’t done much worth a book.

Both he and then bank MD and CEO Aditya Puri cooperated fully once I switched track and decided to write a book on HDFC Bank instead. They then introduced me to their colleagues, early investors and walked me through the history. I had a few cups of tea and the odd kachori at the bank headquarters while discussing the book.

If there’s one thing that stands out about this institution, it’s cost-consciousness. That discipline plays a key role in its success.

Now, to your real question — is this a different HDFC Bank today? Yes, unquestionably.

Puri had the longest innings of any Indian bank CEO — more than a quarter century. Remember, the retirement age for private bank chief executives was capped at 65 before being raised to 70, and Puri was one of two bank heads at the time who got that five-year extension right before it would otherwise have ended his term. The other being the then IndusInd Bank chief Ramesh Sobti.

Puri had an extraordinarily long run. Once the baton passed on to Sashi Jagdishan, this became, in the last six years, a different bank from what it was before.

In your observation, what are the major differences between the bank Aditya Puri led and the one Sashidhar Jagdishan has led?

You have to see this in context; I can’t answer it in isolation. Through Puri’s time, HDFC Bank went through two mergers. The first was with Times Bank, back around 2000. That merger was value-accretive almost immediately — the market rewarded it fast.

The second, in 2008, was Centurion Bank of Punjab, itself the product of an earlier merger between Centurion Bank and Bank of Punjab. That was a share-swap deal too, but the stock fell around 4 per cent on the day of the merger announcement. It was not value-accretive on day one.

Now come to the Jagdishan era.

His single biggest task, and I’ll come to the other issues later, was overseeing the merger of HDFC — the parent — into the bank. That was a genuine giant of a transaction.

HDFC had always been an odd fit within India’s financial architecture: A parent company holding a substantial stake in a bank while operating in the same line of business, at least in one segment.

The Reserve Bank of India had been pushing back on that structure for years — this isn’t speculation, I know this for a fact — insisting it couldn’t continue. Because of HDFC’s dominance in mortgages, the bank had stayed out of that market; instead, there was an arrangement where HDFC Bank sourced mortgage customers and passed them to HDFC, earning a commission, while the loan itself sat on HDFC’s book.

Here’s the problem: The bank has taken long to absorb this merger and benefit from it. Let me explain, without getting too technical.

HDFC Bank’s traditional edge was its low-cost of funds, which kept its net interest margin — loosely, the gap between what it pays for money and what it earns on lending — healthy.

Once the mortgage book, which yields relatively lower, came onto the balance sheet, the margin came under pressure. At the same time, on the liabilities side, the bank had to take care of the mortgage company’s wholesale borrowing, which costs more than ordinary deposits.

Pre-merger, HDFC Bank was known for high CASA — current and savings account balances, a term the bank itself is credited with popularising — which is low-cost money, as current accounts pay no interest and the bank never needed to chase savings rates the way some relatively smaller private banks and small finance banks did and are still doing.

Post-merger, that cheap-funding advantage eroded. Wholesale bonds and certificates of deposit pushed up the cost of funds, and sustaining such a vast mortgage book meant the bank had to keep raising more and more money. That, in turn, pushed up the credit-to-deposit ratio.

Add to this, the regulatory requirements — the cash reserve ratio, currently 3%, on which banks earn nothing, and the statutory liquidity ratio, requiring investment in government bonds.

As assets grew, the bank needed proportionately larger liabilities to fund its regulatory buffers, and no transitional concessions were offered on any of this by the banking regulator.

There’s also the priority-sector lending obligation, which mandates that a share of the loan book goes towards certain categories of loans.

Affordable housing carries the priority sector tag but in sync with the size of the HDFC mortgage book, the bank had to arrange the proportionate priority loans in other segments.

Put all of that together, along with some HR churn and asset-quality issues that were real but not alarming for a bank of this size, and you understand why HDFC Bank has arguably been the worst-performing large bank in the sector over the past few years — worse, in fact, than every large peer barring one relatively smaller bank that got its licence around 2015.

You can see it in the falling foreign institutional holding, in compressed return on equity and return on assets. I wouldn’t call the merger as the single contributing factor but it has had a direct, measurable impact on performance.

‘HDFC Bank’s balance sheet is not loaded with bad assets’

Aditya Puri built HDFC Bank into one of India’s most admired private lenders. But isn’t the real test of a great leader in what the institution looks like once he or she has gone?
Has the post-Puri period raised questions about whether the institutional framework he built was strong enough to outlast his legacy?

IMAGE: Sashidhar Jagdishan, MD & CEO, HDFC Bank. Photograph: Kind courtesy TERumel/wikipedia.org/Creative Commons, background image Shailesh Andrade/Reuters

That’s an important question, and it applies well beyond HDFC Bank — across corporate India, most institutions, banks or non-banks, promoter-driven or not.

In family-run groups, succession usually passes smoothly to the next generation. In professionally run institutions, it’s far trickier, and nowhere trickier than in banking, because banking deals in public money.

And, beyond shareholders and the board, there is the (banking) regulator (RBI) to approve who will be at the helm. Finally, unlike other corporate entities, globally, banks are often identified with the leader.

It’s unlike any other industry in one crucial way: The raw material and the finished product are the same thing. I take your deposit and hand it back out, reshaped, as a mortgage or retail or corporate loan. Compare that to a cement plant or an oil company — entirely different.

As I have already said, because banking’s a highly regulated business, the regulator has a say in who runs it next, which shareholders of a non-financial company never have to contend with.

Now, well before Puri’s retirement, there was a person widely seen as his heir apparent — Paresh Sukthankar, who held the title of deputy managing director. But as Puri’s term neared its end, investors were told, more than once, that Sukthankar wasn’t the automatic choice — that the board would decide the successor.

Puri never said Sukthankar wouldn’t get it; he simply left the question open and handed it to the board. For whatever reason, Sukthankar left the bank, and the board settled on Sashi Jagdishan — the chief financial officer who was redesignated as Strategic Change Agent in 2019, a year before he took over the mantle.

Despite Jagdishan’s evident hard work and intent, things haven’t gone the way they should have. Part of that is the merger, which still hasn’t turned value-accretive.

There are other threads too — the workforce and senior leadership were, in my understanding, not always pulling in the same direction.

And the chairman and the CEO weren’t always in sync either — you can infer that from the way the previous chairman (Atanu Chakraborty) left before his term was up, and from the letter he made public, which raised governance concerns without spelling them out.

One does wonder why that letter was made public at all.

Why? The answer is simply governance — much as the board later made Jagdishan’s own exit letter public.

The chairman chose not to elaborate; he said the specifics were between him and the RBI. But that the damage was done.

I want to be clear about one thing, though. This isn’t the story of a bank whose asset quality was so compromised that it might have collapsed without RBI intervention — the kind of situation we’ve seen at a few other Indian banks in recent years, where the regulator had to step in, supersede boards, or force mergers to protect depositors.

HDFC Bank’s balance sheet is not loaded with bad assets; this isn’t a case of ever-greening. The problems here are of an entirely different character, and, rather unusual for a bank of this size.

Was not enough thought given to the merger while Mr Puri was still at the helm? The bank must have known he would eventually retire — so why was such a consequential transaction left for his successor to execute?

My honest guess — and I can’t vouch for this — is that Puri, given his stature and clout, was able to resist the pressure for as long as he led the bank as he was aware of the side effects, if I may so.

I know for certain that the RBI had been pushing for the merger, given HDFC’s structure. But why it was deferred, I can’t say definitively. It’s possible the pressure simply intensified once Puri left and (the merger) could no longer be resisted.

Either way, the merger is a contributing factor to the bank’s troubles — it is not the sole one.

Once you’re wrestling with making a merger of that scale value-accretive, you’re also under pressure to keep growing the balance sheet and chasing liabilities, and other things start to slip as a consequence.

Layer onto that the sense that the board and the CEO weren’t always fully aligned — I’m not questioning anyone’s judgement, but that’s the impression created.

And notice how many senior executives have left the bank in the past few years. People leaving for a bigger role elsewhere is normal in banking; that’s not what I mean.

There have been departures that weren’t of that kind, including at least one high-profile instance where the RBI itself insisted a very senior executive be moved on. At least a few of them were probably caught in the cross-fire and had to leave.

Taken together, it points to a senior leadership that wasn’t functioning as a genuinely unified team. That’s my reading, and I’m happy to be corrected.